Mapping your retirement journey

Retirement isn’t the end – it’s just another beginning. Join us as we explore the highways and byways of retirement income planning with our trusty guide Billy Burrows.

In my last article here, I showed you how planning for retirement involves two very different elements: your own behaviour, and the technical aspects of pensions themselves. Now it’s time to take a closer look at that ongoing tension between the behavioural factors and the technical factors. Or, to put it another way: what you want, versus what is possible.

Retirement isn’t what it used to be. And that’s a good thing. For many, retirement is not so much a single large event but a series of much smaller events. There’s even a new buzz-phrase for it: ‘the retirement journey’.

The three legs of the retirement journey

To keep it simple, we can divide the retirement journey into three distinct phases. It’s then easier to identify the behavioural and technical factors that affect each stage in turn.

At retirement

Age 55 at the earliest

During retirement

The retirement years

Later retirement

Age 80 Plus

Behavioural factors

Tends to focus on short term benefits rather than longer term objectives. Often feel ‘too young to retire’.

Peace of mind and security more important. Enjoying retirement.

Aware of vulnerability.

Less able to understand detail. Time to keep things simple.

Technical factors

Important to consider all potential retirement solutions e.g. annuities, drawdown or a combination. Also consider how much risk can be taken.

Time to reduce risk and review pension and drawdown plans. There may be a stronger case for an annuity.

Power of Attorney and wills must be in place. Also may consider equity release and the means to fund long-term care.

These three stages are fluid, not set in stone. You may retire at 60, your colleague may work until 70, and it’s not unusual to find people merrily soldiering on at 75 and over. But it still helps to look at retirement in these three steps, because what works for you in early retirement may not be desirable later on. An awful lot can happen in the 25 years between 60 and 85.

The typical retirement journey is full of twists and turns, often triggered by events. For example:

A loved one may need financial help

Your life plans may adjust

Your health may change

Your partner’s health may change

The economy may take a turn for the worse – or better

These are just a few of the obstacles along the way that can lead to a necessary change of direction.

In broad terms, early retirement is when you may feel more open to risk and more in need of flexibility. You may also feel more optimistic about leaving a good inheritance. However, as you get older you may want to take less risk, opt for more certainty, and prioritise your financial security over that of others. These changes tend not to happen overnight, but gradually over the years.

Hazards – and opportunities – along the retirement road

Anyone who’s ever prepared for a journey knows that you can’t plan every detail in advance. What you can do, however, is pack everything you’re likely to need for the trip, so that when the unexpected does happen, you’re better prepared to meet it. In my experience, the best decisions are made when you can align the behavioural and technical factors I mentioned earlier. A practical example of this might be choosing a drawdown scheme in early retirement, while making provision for a switch to an annuity in mid-to-late retirement.

There are three reasons for taking such an approach. Firstly, investing in retirement is very different from investing before it. This is largely down to the ‘sequence of returns risk’. I explain this risk in detail in this article, but in summary it means that a fall in the stock market does far more damage if you’re withdrawing money, rather than paying it in. This means the value of your pot can fall at an alarming rate during times of poor performance. When you’re younger you may be able to make adjustments to your investments or income withdrawal in order to get back on track, but this becomes much harder as you get older.

Secondly, annuities are based on the concept of ‘mortality cross subsidy’ (meaning that those who live longer are subsidised by those who die earlier), and you benefit more from this the older you get. This, combined with the prospects of increased annuity rates in the future, and perhaps an enhancement if your health deteriorates, provides a good argument for considering annuities as you get older.

Thirdly (and you may need to take my word for this!), the older you are, the more concerned you become that you’ll outlive your savings and income. Annuities remain the only product that will guarantee you (or your partner) an income for as long as you live.

The many shades of grey

As you can see, the choice on how to take your pension is not a black-and-white one – there are many shades in between to consider as you yourself turn grey. The right choice for you will depend heavily on your own circumstances, plans and attitudes, so there really is no off-the-peg ‘best option’.

Perhaps the most sensible way to plan the retirement journey is to leave yourself the option of changing course if and when your circumstances change. To start putting such a long-term strategy in place, you should discuss your situation with a retirement expert. The best experts are regulated financial advisers but you can also get initial free guidance from the government sponsored Pension Wise service.